10-Q 1 d10q.txt QUARTERLY REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ________ to _________. Commission File Number 0-23272 NPS PHARMACEUTICALS, INC. (Exact name of Registrant as specified in its charter) Delaware 87-0439579 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 420 Chipeta Way, Salt Lake City, Utah 84108-1256 (Address of principal executive offices) (Zip Code) (801) 583-4939 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. YES |X| NO |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 12, 2001 ---------------------------- --------------------------------- Common Stock $.001 par value 30,038,611* * Includes 879,866 shares of exchangeable stock which are exchangeable at any time into common stock on a one-for-one basis. Holders of shares of exchangeable stock are entitled to dividends and other rights economically equivalent to those of the common stock, and, through a voting trust, holders are entitled to vote at all meetings of stockholders of the Registrant on a one-for-one basis. ================================================================================ TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page No. -------- Item 1. Condensed Consolidated Financial Statements. Condensed Consolidated Balance Sheets ............................. 3 Condensed Consolidated Statements of Operations ................... 4 Condensed Consolidated Statements of Cash Flows ................... 5 Notes to Condensed Consolidated Financial Statements .............. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................ 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 14 PART II OTHER INFORMATION Item 6. Exhibits and Report on Form 8-K ...................................... 15 SIGNATURES .................................................................... 15
NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise) Condensed Consolidated Balance Sheets (In thousands) (Unaudited)
September 30, 2001 December 31, 2000 ------------------ ----------------- Assets Current assets: Cash and cash equivalents $ 48,348 $ 131,083 Marketable investment securities 171,963 115,853 Accounts receivable 1,328 523 Other current assets 4,444 1,129 ------------------ ----------------- Total current assets 226,083 248,588 Restricted marketable investment securities - 754 Plant and equipment: Land 412 434 Building 1,107 1,164 Equipment 8,739 7,532 Leasehold improvements 2,902 2,767 ------------------ ----------------- 13,160 11,897 Less accumulated depreciation and amortization 8,108 6,922 ------------------ ----------------- Net plant and equipment 5,052 4,975 Goodwill, net of accumulated amortization 7,328 9,072 Purchased intangible assets, net of accumulated amortization 4,354 5,867 Other assets 2 14 ------------------ ----------------- $ 242,819 $ 269,270 ================== ================= Liabilities and Stockholders' Equity Current liabilities: Current installments of obligations under capital leases $ 6 $ 305 Accounts payable 4,271 813 Accrued expenses 2,839 2,604 Accrued severance 129 154 ------------------ ----------------- Total current liabilities 7,245 3,876 Obligations under capital leases, excluding current installments - 54 ------------------ ----------------- Total liabilities 7,245 3,930 Stockholders' equity: Common stock 30 30 Additional paid-in capital 381,279 377,802 Deferred compensation (118) (800) Accumulated other comprehensive income (loss) 1,778 (657) Deficit accumulated during development stage (147,395) (111,035) ------------------ ----------------- Net stockholders' equity 235,574 265,340 ------------------ ----------------- $ 242,819 $ 269,270 ================== =================
See accompanying Notes to Condensed Consolidated Financial Statements. 3 NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise) Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited)
Three Months Ended Three Months Ended October 22, 1986, September 30, September 30, (inception) through 2001 2000 2001 2000 September 30, 2001 --------- --------- ---------- --------- ------------------ Revenues from research and license agreements $ 395 $ 1,654 $ 1,377 $ 5,808 $ 64,486 Operating expenses: Research and development 14,041 6,442 38,238 20,403 157,694 General and administrative 2,512 2,954 8,988 9,746 56,040 Amortization of goodwill and acquired intangibles 856 874 2,580 2,694 6,141 In-process research and development acquired - - - - 17,760 --------- --------- ---------- --------- ---------- Total operating expenses 17,409 10,270 49,806 32,843 237,635 --------- --------- ---------- --------- ---------- Operating loss (17,014) (8,616) (48,429) (27,035) (173,149) Other income (expense): Interest income 2,688 1,214 9,666 2,587 26,208 Interest expense - (27) (5) (77) (807) Gain on sale of marketable investment securities 137 (9) 961 79 1,159 Gain (loss) on disposition of equipment, leasehold improvements and leases - 26 11 (1,098) (1,186) Foreign currency transaction gain 17 15 38 99 176 Other 47 14 1,398 43 1,722 --------- --------- ---------- --------- ---------- Total other income 2,889 1,233 12,069 1,633 27,272 --------- --------- ---------- --------- ---------- Loss before tax expense (14,125) (7,383) (36,360) (25,402) (145,877) Income tax expense - - - - 1,018 --------- --------- ---------- --------- ---------- Loss before cumulative effect of change in accounting principle (14,125) (7,383) (36,360) (25,402) (146,895) Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method - - - (500) (500) --------- --------- ---------- --------- ---------- Net loss $ (14,125) $ (7,383) $ (36,360) $ (25,902) $ (147,395) ========= ========= ========== ========= ========== Basic and diluted loss per common and common equivalent share: Loss before cumulative effect of change in accounting principle $ (0.47) $ (0.30) $ (1.22) $ (1.12) Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method $ - $ - $ - $ (0.02) --------- --------- ---------- --------- Net loss $ (0.47) $ (0.30) $ (1.22) $ (1.14) ========= ========= ========== ========= Weighted average common and common-equivalent shares outstanding - basic and diluted 29,993 24,903 29,859 22,791 ========= ========= ========== =========
See accompanying Notes to Condensed Consolidated Financial Statements. 4 NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise) Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
October 22, 1986 Nine Months Ended September 30, (inception) through ------------------------------------ 2001 2000 September 30, 2001 ---------------- ---------------- ------------------- Cash flows from operating activities: Net loss $ (36,360) $ (25,902) $ (147,395) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,812 4,172 15,950 Loss (gain) on disposition of equipment, leasehold improvements and leases (11) 1,098 1,186 Realized gain on sale of marketable investment securities (961) (79) (1,159) Issuance of common and preferred stock in lieu of cash for services 394 241 1,669 Compensation expense on stock options 1,853 1,406 4,474 Write off of in-process research and development - - 17,760 Decrease (increase) in operating assets: Accounts receivable (845) 144 (1,001) Other current assets and other assets (3,500) (163) (3,999) Increase (decrease) in operating liabilities: Accounts payable, accrued expenses and accrued severance 3,914 1,188 5,272 Deferred income - (711) (486) Due to related parties - 59 - --------------- --------------- ---------------- Net cash used in operating activities (31,704) (18,547) (107,729) Cash flows from investing activities: Net purchase of marketable investment securities (51,234) (26,940) (156,823) Acquisition of equipment and leasehold improvements (1,430) (99) (11,631) Proceeds from sale of equipment 11 79 1,286 Cash paid for acquisition, net of cash received - - (676) --------------- --------------- ---------------- Net cash used in investing activities (52,653) (26,960) (167,844) Cash flows from financing activities: Proceeds from note payable to bank - - 124 Proceeds from issuance of preferred stock - - 17,581 Proceeds from issuance of common stock 2,071 55,926 310,480 Proceeds from long-term debt - - 1,166 Principal payments on note payable to bank - - (124) Principal payments under capital lease obligations (344) (296) (2,157) Principal payments on long-term debt - (3) (2,854) Repurchase of preferred stock - - (300) --------------- --------------- ---------------- Net cash provided by financing activities 1,727 55,627 323,916 Effect of exchange rate changes on cash (105) 76 5 --------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents (82,735) 10,196 48,348 Cash and cash equivalents at beginning of period 131,083 13,116 - --------------- --------------- ---------------- Cash and cash equivalents at end of period $ 48,348 $ 23,312 $ 48,348 =============== =============== ================
See accompanying Notes to Condensed Consolidated Financial Statements. 5 NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise) Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
October 22, 1986 Nine Months Ended September 30, (inception) through ------------------------------------ 2001 2000 September 30, 2001 ---------------- ---------------- ------------------- Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 5 $ 77 $ 807 Cash paid for taxes - - 1,018 Supplemental Schedule of Noncash Investing and Financing Activities: Acquisition of equipment through incurrence of capital lease obligations - - 1,478 Acquisition of leasehold improvements through incurrence of debt - - 197 Issuance of stock for stock subscription receivable 35 - 4,035 Accrual of deferred offering costs - - 150 Change in unrealized gain/loss on marketable investment securities 3,255 119 3,446 Issuance of common stock in exchange for minority interest - 2,500 2,500
See accompanying Notes to Condensed Consolidated Financial Statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements included herein have been prepared by NPS Pharmaceuticals, Inc. (NPS) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The condensed consolidated financial statements include the financial statements of NPS and its operating subsidiaries NPS Allelix Corp. (NPS Allelix), Allelix Neuroscience Inc., and NPS Services, L.C., collectively referred to as the Company. Investments in a limited liability partnership and in non-public corporations, in which the Company has the ability to exercise significant influence, but not control, are accounted for by the equity method. The Company carries all other investments in non-public corporations at cost. In management's opinion, the interim financial data presented includes all adjustments (consisting solely of normal recurring items) necessary for fair presentation. All intercompany accounts and transactions have been eliminated. All monetary amounts are reported in U.S. dollars unless specified otherwise. Certain information required by generally accepted accounting principles has been condensed or omitted pursuant to rules and regulations of the SEC. Operating results for the three and nine months ended September 30, 2001, are not necessarily indicative of the results that may be expected for any future period or the year ending December 31, 2001. This report should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto for the year ended December 31, 2000, included in the Company's Annual Report on Form 10-K filed with the SEC. The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (2) Loss Per Common Share Basic loss per common share is the amount of loss for the period available to each common and exchangeable share outstanding during the reporting period. Diluted loss per common share is the amount of loss for the period available to each common and exchangeable share outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of all potentially dilutive common stock equivalents outstanding during the period. Loss per common share was the same for both the basic and diluted calculations. Common stock equivalents (stock options and warrants outstanding) of approximately 2.6 million shares for each of the three and nine month periods ended September 30, 2001 and 2000, that could potentially dilute basic earnings (loss) per share in the future were not included in the computation of diluted loss per share because to do so would have been anti-dilutive for the periods presented. (3) Operating Segment The Company is engaged in the discovery, development, and commercialization of small molecule drugs and recombinant proteins and in its current state of development, considers its operations to be a single reportable segment. Financial results of this reportable segment are presented in the accompanying condensed consolidated financial statements. 7 (4) Comprehensive Loss The components of the Company's comprehensive loss are as follows, in thousands:
Three months Three months Nine months Nine months ended ended ended ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 --------------- ------------- -------------- ------------- Other comprehensive loss: Gross unrealized gain on marketable investment securities $ (3,171) (35) (4,216) (198) Reclassification for realized gain (loss) on marketable investment securities 137 (9) 961 79 --------------- ------------- -------------- ------------- Net unrealized gain on marketable investment securities (3,034) (44) (3,255) (119) Foreign currency translation loss 716 711 820 765 Net loss 14,125 7,383 36,360 25,902 --------------- ------------- -------------- ------------- Comprehensive loss $ 11,807 $ 8,050 $ 33,925 $26,548 =============== ============= ============== =============
(5) Plan of Termination As of December 31, 2000, the Company had a balance of approximately $154,000 for accrued severance for salaries and benefits payable to former employees under formal plans of termination. This entire amount was paid in severance benefits during the nine months ended September 30, 2001. Effective February 6, 2001, the Company terminated the employment of five administrative employees. The Company recorded $516,000 for severance benefits for these employees, which was included in general and administrative expense during the three months ended March 31, 2001. Approximately $153,000 of this amount was paid through September 30, 2001 in severance benefits and approximately $234,000 was charged to additional paid-in capital during the nine months ended September 30, 2001. (6) Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of the pooling-of-interests method of accounting and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and is applicable to all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies that intangible assets acquired in a purchase method business combination must meet certain criteria to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized effective January 1, 2002, rather, these assets must be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. 8 Beginning January 1, 2002, the Company expects to have unamortized goodwill in the amount of $6.9 million and unamortized identifiable intangible assets in the amount of $3.9 million, all of which will be subject to the transition provisions of SFAS Nos. 141 and 142. Amortization expense related to goodwill and assembled work force was $2.2 million and $1.6 million for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting SFAS Nos. 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. The FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in 1998. SFAS No. 133, as amended by SFAS Nos. 137 and 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. Because the Company does not currently hold any derivative instruments and does not engage in hedging activities, the Company's adoption of SFAS No. 133, on January 1, 2001, did not have an impact on its consolidated financial position, results of operations, or cash flows. In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, Revenue Recognition (SAB No. 101) to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 explains the SEC's general framework for revenue recognition. The Company adopted SAB No. 101 in the fourth quarter of 2000 and in accordance with Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, and Statement of Financial Accounting Standards (SFAS) No. 3, Reporting Accounting Changes in Interim Financial Statement, quarterly results of operations for 2000 have been restated to reflect the new revenue recognition policy. The effect of the adoption of SAB No. 101 on deficit accumulated during development stage as of January 1, 2000 has been reflected as a cumulative effect of change in accounting principle in the net loss for the nine months ended September 30, 2000. Based on the criteria included in SAB No. 101, the Company concluded that nonrefundable license fees should be recognized over the period wherein the Company has continuing involvement. The cumulative effect includes the reversal of $500,000 related to revenue recognized in prior periods, $250,000 of which was recognized in the three months ended March 31, 2000, and the remaining $250,000 of which was then recognized in the three months ended June 30, 2000. (7) Legal Proceedings The Company is involved in various legal actions that arose in the normal course of business. Although the final outcome of such matters cannot be predicted, the Company believes the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED IN THIS DOCUMENT, AS WELL AS IN OUR ANNUAL REPORT ON SEC-FILED FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000, UNDER THE HEADING "RISK FACTORS." Overview We discover, develop and intend to commercialize small molecule drugs and recombinant proteins, primarily for bone and mineral disorders and central nervous system disorders. We have six drugs in clinical development and several preclinical product candidates. Our two most advanced product candidates focus on bone and mineral disorders. They are AMG 073, which has completed a series of Phase II clinical trials for treatment of hyperparathyroidism, and ALX1-11, which is in a pivotal Phase III clinical trial for treatment of post-menopausal osteoporosis. Substantially all of our resources are devoted to our research and development programs. To date, we have not completed the development of any pharmaceutical product for sale. We have incurred cumulative losses through September 30, 2001 of approximately $147.4 million, net of cumulative revenues from research and license agreements of approximately $64.5 million. We expect to incur significant operating losses over at least the next several years as we continue current clinical trial activities, expand our clinical trials for other product candidates, and research activities. In particular, we are conducting a Phase III clinical trial for ALX1-11, and expect to expend significant resources on the development of this product. Results of Operations Revenues Substantially all our revenues have come from license fees, milestone payments, and research and development support payments from our licensees and collaborators. These revenues fluctuate from quarter to quarter. Our revenues were $395,000 for the quarter ended September 30, 2001, compared to $1.7 million for the quarter ended September 30, 2000. Revenues for the nine months ended September 30, 2001 were $1.4 million compared to $5.8 million for the same period in the prior year. The decrease in revenues for the three and nine months ended September 30, 2001 was primarily due to the expiration during 2000 of research and development support payments under existing license or collaborative agreements. We expect that revenues in the fourth quarter of 2001 will be about $8.0 million if Amgen starts a Phase III trial with AMG 073 in dialysis patients before the end of the quarter, and about $2.0 million if Amgen does not start this trial before the end of the quarter. See "Liquidity and Capital Resources" below for further discussion of payments that we may earn in the future under these agreements. Operating Expenses Research and Development Our research and development expenses arise primarily from compensation and other related costs of our personnel who are dedicated to research and development activities and from the fees paid and costs reimbursed to outside professionals to conduct research, clinical studies and trials, and manufacturing of 10 drug compounds and related supplies prior to FDA approval. Our research and development expenses increased to $14.0 million for the quarter ended September 30, 2001 from $6.4 million for the comparable period of 2000 and to $38.2 million for the nine months ended September 30, 2001 from $20.4 million in the comparable period in 2000. Research and development expenses increased over the prior year amounts primarily due to the cost of the advancing Phase III clinical trial for ALX1-11. We expect research and development expenses to be approximately $15.0 to $20.0 million in the fourth quarter of 2001. The anticipated increase is due to the conduct of Phase III clinical trial for ALX1-11, conducting portions of our clinical trials for ALX1-11 outside of the United States, manufacturing ALX1-11 in anticipation of FDA approval, and preparing for additional Phase II clinical trials for ALX-0600. We may incur additional research and development expenses if we start other clinical trials, or if we acquire new technologies, product candidates or companies. General and Administrative Our general and administrative expenses consist primarily of the costs of our management and administrative staff, business insurance, taxes and professional fees. Our general and administrative expenses of $2.5 million for the quarter ended September 30, 2001 were comparable with $3.0 million for the quarter ended September 30, 2000. Additionally, general and administration expenses of $9.0 million for the nine months ended September 30, 2001 were comparable with $9.7 million for the same period in the prior year. We expect that general and administrative expenses in the fourth quarter of 2001 will be approximately $2.5 to $3.0 million. Amortization of Goodwill and Acquired Intangibles We are required to amortize goodwill and other acquired intangibles as a result of our December 1999 acquisition of Allelix Biopharmaceuticals Inc. ("Allelix"). The remaining intangible assets at September 30, 2001 total approximately $11.7 million. We are amortizing these assets over their expected lives, which range from two to six years at the time of acquisition. We recorded amortization expense of $856,000 for the three months ended September 30, 2001 as compared to $874,000 for three months ended September 30, 2000, and $2.6 million for the nine months ended September 30, 2001 as compared to $2.7 million for the same period in the prior year. In-Process Research and Development Acquired We recorded an expense of $17.8 million in 1999 for in-process research and development that we acquired as part of our purchase of Allelix. The acquired in-process research and development consisted of five drug development programs. ALX1-11, for osteoporosis, and ALX-0600, for gastrointestinal disorders, accounted for 83% of the total value of the acquired in-process research and development. Since the date of the acquisition, we revised our plans for the next series of clinical trials for ALX1-11 and ALX-0600. We started a pivotal Phase III clinical trial with ALX1-11. We also started enrolling a small number of patients in a pilot Phase II clinical trial with ALX-0600. Since the date of acquisition and through September 30, 2001, we have incurred development costs of approximately $39.3 million for ALX1-11 and $4.2 million for ALX-0600. Total development costs and time-to-completion for each of these product candidates will depend on the costs we incur to conduct current clinical trials and to perform any additional work we find necessary to obtain FDA approval. 11 We believe the assumptions we used in the valuation of the in-process research and development we acquired from Allelix were reasonable at the time of the acquisition. However, we have modified our development plans, as new data have become available regarding each product candidate. Accordingly, actual results may vary from the projected results in the valuation. Total Other Income, Net Our total other income, net, increased from $1.2 million to $2.9 million for the three months ended September 30, 2001 as compared with the same period in the prior year, and from $1.6 million to $12.1 million for the nine months ended September 30, 2001 as compared with the same period in the prior year. The increases for the three and nine months ended September 30, 2001 are mainly the result of increased interest income of $1.5 million and $7.1 million, respectively, and an increased gain on sale of marketable investment securities of $146,000 and $882,000, respectively, both resulting from higher cash, cash equivalent, and marketable investment security balances. These balances increased primarily due to cash received from a private placement offering of 3.9 million common shares of the Company which was completed in February 2000 and closed in April 2000, and from a follow-on offering of 4.6 million common shares of the Company which was completed in November 2000. We expect that interest income will continue to be higher in 2001 due to higher average cash, cash equivalent, and marketable investment security balances for the year resulting from these offerings in 2000. However, we anticipate that interest income will decrease in the future as cash is utilized for operations. Additionally, we recorded a non-cash loss of approximately $1.2 million during the nine months ended September 30, 2000 associated with closing a facility in New Jersey that we acquired as part of the Allelix transaction. A similar loss was not recorded during the nine months ended September 30, 2001. Finally, during the nine months ended September 30, 2001, we recorded income from an equity investment of $1.3 million. Our equity investee distributed proceeds from the sale of substantially all of its assets to a third party. We expect that total other income, net, to be $2.2 million to $2.7 million in the fourth quarter of 2001. Cumulative Effect on Prior Years (to December 31, 1999) of Changing to a Different Revenue Recognition Method In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, Revenue Recognition (SAB No. 101) to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 explains the SEC's general framework for revenue recognition. We adopted SAB No. 101 in the fourth quarter of 2000 and in accordance with Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, and Statement of Financial Accounting Standards (SFAS) No. 3, Reporting Accounting Changes in Interim Financial Statement, quarterly results of operations for 2000 have been restated to reflect the new revenue recognition policy. The effect of the adoption of SAB No. 101 on deficit accumulated during development stage as of January 1, 2000 has been reflected as a cumulative effect of change in accounting principle in the net loss for the nine months ended September 30, 2000. Based on the criteria included in SAB No. 101, we concluded that nonrefundable license fees should be recognized over the period wherein we have continuing involvement. The cumulative effect includes the reversal of $500,000 related to revenue recognized in prior periods, $250,000 of which was recognized in the three months ended March 31, 2000, and the remaining $250,000 of which was then recognized in the three months ended June 30, 2001. Liquidity and Capital Resources We have financed operations since inception primarily through collaborative research and license agreements and the private and public placement of equity securities. As of September 30, 2001, we had recognized $64.5 million of cumulative revenues from payments for research support and license fees and $327.8 million from the sale of equity securities for cash. The sale of equity securities includes $1.7 million 12 received from the exercise of options and warrants during the first nine months of 2001 and $338,000 from the sale of common stock under the terms of our Employee Stock Purchase Plan. Our principal sources of liquidity are cash, cash equivalents, and marketable investment securities, which totaled $220.3 million at September 30, 2001. Net cash used in operating activities was $31.7 million for the nine months ended September 30, 2001 compared to $18.5 million for the nine months ended September 30, 2000. Net cash used in operating activities for the nine months ended September 30, 2001 of $31.7 million resulted from a net loss of $36.4 million, realized gains/losses and non-cash expense/income of $5.1 million, an increase in operating assets of $4.3 million and an increase in operating liabilities of $3.9 million. Net cash used in operating activities for the nine months ended September 30, 2000 of $18.5 million resulted from a net loss of $25.9 million, realized gains/losses and non-cash expense/income of $6.8 million, an increase in operating assets of $19,000 and an increase in operating liabilities of $536,000. Net cash used in investing activities was $52.7 million for the nine months ended September 30, 2001 compared to $30.0 million for the nine months ended September 30, 2000. Net cash used in investing activities in 2001 was almost entirely the result of continuing to invest the proceeds from our offerings in 2000 in marketable investment securities. Net cash provided by financing activities was $1.7 million for the nine months ended September 30, 2001 compared to $55.6 million for the nine months ended September 30, 2000. Net cash provided by financing activities in 2000 resulted primarily from the proceeds from our private placement, which closed in April 2000. During the past, we have received quarterly research and/or development support payments under our agreements with Amgen, Kirin, and GlaxoSmithKline, and under NPS Allelix's agreements with Janssen and Eli Lilly Canada. With the exception of GlaxoSmithKline, all of the research and development support payments under these agreements expired in 2000. Funded research with GlaxoSmithKline continues on a month-to-month basis. We do not receive any research and development support payments under our agreements with Abbott Laboratories, Forrest Laboratories, or AstraZeneca. However, we could receive future payments of up to $142.5 million in the aggregate if each of our several licensees accomplishes the specified research and/or development milestones provided in the several agreements with these licensees. Some of the late-stage development milestone payments will not be due from AstraZeneca if we elect a co-promotion option. All of the agreements also require the licensees to make royalty payments to us if they sell products covered by the terms of our license agreements. However, we do not control the subject matter, timing or resources applied by our licensees to their development programs. Thus, potential receipt of milestone payments from these licensees is largely beyond our control. Each of these agreements may be terminated before its scheduled expiration date by the respective licensee under certain conditions. We have an agreement with Technology Partnerships Canada ("TPC"), a Canadian government program, under which TPC will reimburse us for a portion of our research and development expenses for our ALX-0600 product candidate. TPC will reimburse us for 30% of the qualified costs we incur through December 2002, to a maximum of Cdn. $8.4 million. We will pay a 10% royalty to TPC on revenues received from the sale or license of any product we develop from the funded research. These payments terminate in December 2008 if we have paid TPC a total of at least Cdn. $23.9 million through that date. If we have paid TPC less than that amount through that date, the payments continue until the earlier of when we have paid TPC a total of Cdn $23.9 million or December 2017. As of September 30, 2001, we have invoiced TPC for a total of Cdn $4.0 million for reimbursement. If TPC declares an event of default under the agreement, we could be required to repay all amounts received from TPC, plus interest and other damages. As of September 30, 2001, no event of default has been declared. We have entered into service agreements and sponsored research and license agreements that obligate us to purchase services and to make research support payments to academic and/or commercial research institutions. We may be required to make additional payments if the research institutions reach milestones, or for license fees or royalties to maintain the licenses. We expect to enter into additional sponsored research and license agreements in the future. 13 We expect that our existing capital resources, including interest earned thereon, will be sufficient to allow us to maintain our current and planned operations for at least the next 24 months. However, our actual needs will depend on numerous factors, especially with regard to the clinical trial and pre-launch marketing and production costs for ALX1-11. Furthermore, if we advance current proprietary programs or if we in-license or otherwise acquire other technologies, product candidates or companies, we may need to make substantial additional expenditures. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of the pooling-of-interests method of accounting and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and is applicable to all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies that intangible assets acquired in a purchase method business combination must meet certain criteria to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized effective January 1, 2002, rather, these assets must be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Beginning January 1, 2001, we expect to have unamortized goodwill in the amount of $6.9 million and unamortized identifiable intangible assets in the amount of $3.9 million, all of which will be subject to the transition provisions of SFAS Nos. 141 and 142. Amortization expense related to goodwill and assembled work force was $2.2 million and $1.6 million for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting SFAS Nos. 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on our financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. The FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities in 1998. SFAS No. 133, as amended by SFAS Nos. 137 and 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. Because we do not currently hold any derivative instruments, and do not engage in hedging activities, our adoption of SFAS No. 133 on January 1, 2001 did not have an impact on our consolidated financial position, results of operations, or cash flows. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Risk Our primary objectives in managing our investment portfolio are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The securities we hold in our investment portfolio are subject to interest rate risk. We have established policies and procedures to manage exposure to fluctuations in interest rates. We place our investments with high quality issuers and limit the amount of 14 credit exposure to any one issuer and do not use derivative financial instruments in our investment portfolio. We maintain an investment portfolio of various issuers, types and maturities, which consist mainly of fixed rate financial instruments. These securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as accumulated other comprehensive income as a separate component in stockholders' equity. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. Currently, we do not hedge these interest rate exposures. After a review of our marketable securities, we believe that in the event of a hypothetical 10% increase in interest rates, the resulting decrease in fair market value of our marketable investment securities would be insignificant to the financial statements. Foreign Currency Risk Some of our research and development operations are in Canada. As a result, our financial results could be affected by factors such as a change in the foreign currency exchange rate between the U.S. dollar and the Canadian dollar, or by weak economic conditions in Canada. When the U.S. dollar strengthens against the Canadian dollar, the cost of expenses in Canada decreases. When the U.S. dollar weakens against the Canadian dollar, the cost of expenses in Canada increases. The monetary assets and liabilities in our foreign subsidiary which are impacted by the foreign currency fluctuations are cash, marketable investment securities, accounts receivable, accounts payable, and certain accrued liabilities. A hypothetical 10% increase or decrease in the exchange rate between the U.S. dollar and the Canadian dollar from the September 30, 2001 rate would cause the fair value of such monetary assets and liabilities in Canada to change by an insignificant amount. We are not currently engaged in any foreign currency hedging activities, although we may engage in those types of activities in the future. Part II. OTHER INFORMATION Item 6. Exhibits and Report on Form 8-K. (b) Reports on Form 8-K. None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NPS Pharmaceuticals, Inc. Date: November 14, 2001 By: /s/ James U. Jensen ----------------------------------------- James U. Jensen, Vice President Corporate Development and Legal Affairs (Executive Officer) Date: November 14, 2001 By: /s/ Robert K. Merrell ----------------------------------------- Robert K. Merrell, Vice President, Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 15